Despite success finding buyers yesterday, Tucson Electric Power Co. will try to jettison its municipal dutch auctions next month by converting its outstanding debt to fixed-rate bonds, according to the utility's financial adviser.
Joseph Fichera, managing director of corporate finance at Bear, Stearns & Co., said the company will begin taking orders for the long-term securities immediately and decide by the first week of December whether a conversion at a rate acceptable to the utility is possible.
The move, which the utility last month said it was considering, comes just as Tucson's auctions are beginning to show signs of life, after a 16-month string of failures. Yesterday saw the second consecutive successful auction since the losing streak ended in October.
Mr. Fichera said the auction, which was oversubscribed, resulted in a 7.39% yield for the utility. That compares with the 8.75% rate that emerged from the successful auction last month.
The last failed auction, in September, forced Tucson to pay a penalty rate of 12.6% on the variable-rate tax-exempt securities, issued through the Pima County, Ariz., Industrial Development Authority.
The bonds are rated triple-A based on backing from Financial Security Assurance. But despite the insurance and high yields, the auctions for more than a year consistently failed to find enough bidders to succeed.
The Tucson deal, which debuted Goldman, Sachs & Co.'s Periodic Auction Reset Securities product in 1988, was supposed to provide the utility with the lowest possible yield by resetting rates every month at the auctions.
In a dutch auction, potential investors submit bids reflecting the yield they would be willing to accept to purchase the bonds. The lowest bid needed to clear the entire issue is determined, and every bidder at or below the given level receives that yield, regardless of their bid.
But in a failed auction, not enough bids to cover the entire issue are received, meaning at least one bondholder that wants to dump his securities is unable to do so. In that event, none of the bids are accepted, and a penalty yield is set at a predetermined percentage of a special J.J. Kenny index.
That penalty brought the yield to unheard of levels for tax-exempt triple-A bonds when it peaked at 12.6% in September. Following that auction, Tucson dropped Goldman Sachs as the marketing agent on the deal and hired Bear Stearns to handle the auctions and help decide whether to convert the bonds to fixed-rate securities.
Several sources involved in the deal said the Tucson auctions failed because of liquidity concerns when the utility's credit took a nosedive last year. Short-term investors feared an auction failure would leave them stuck with a long-term investment, so they stayed away and contributed to the lack of interest in the auctions.
Other market watchers blamed the marketing effort, saying the auctions should have worked even with liquidity concerns because of the strenth of the FSA backing.
Officials at Goldman Sachs said the auctions began to succeed last month because the utility made statements indicating it would probably convert to long-term debt, easing investors' liquidity concerns.
Mr. Fichera said renewed interest in the auctions reflects a marketing effort, directed primarily at long-term funds, that focuses on the FSA insurance. He said the recent successes show there is adequate interest in the issue among investors, "and we think [the fixed-rate bonds] will be well-received."